Category Archives: Exchanges

What Happens When HACK Gets Hacked By Insider

Investors in the PureFunds ISE Cyber Security ETF (HACK) woke up Aug. 1 to find their fund had a new name, ETFMG Prime Cyber Security ETF, and tracks a new index.

a stunning development, the fund’s advisor, ETF Management Group, had rebranded the entire family of PureFunds ETFs with the ETFMG name, and began following indexes from a new firm called Prime Indexes.

Since the change, $36 million has flowed out of HACK, which has $1.1 billion in assets, according to Morningstar Inc. The outflow has coincided with a pullback in cybersecurity stocks and the ETFs that invest in them.

While HACK’s old and new indexes both track the same securities, there were some slight changes in the new index to conform with a new methodology and improve implied liquidity, said Sam Masucci, chief executive of ETF Management Group. The change had little effect on the share price.

The story highlights the issues small asset managers without infrastructure can run into. ETF MG is known as the advisor. It provides the infrastructure for operating the ETF and portfolio management, as well as manages the third-party relationships with outsourced services, such as custodians, legal and auditing. ETF MG has 13 funds on the market.

PureFunds was the sponsor, covering most of the costs. Typically, the sponsor’s role is branding, marketing and consumer education. ETF MG is now the sponsor.

Unlike the ETFs of most small asset managers, when HACK launched in 2014 it was an immediate hit. It quickly gathered $1 billion in assets. Andrew Chanin, Pure Funds’ chief executive, was lauded as an ETF wunderkind. Altogether, PureFunds launched eight funds with ETF MG, six of which will continue under the ETF MG name. The other two were closed in July.

“People come to us with ideas that we turn into ETFs and operate. We are a comprehensive service company,” said Masucci. “Their role is market education. With more than a dozen partners, we’ve only had one that went this direction.”

Masucci said the dispute started in April when the board voted to lower the fund’s expense ratio to 0.6% from 0.75% in order to better compete with First Trust Nasdaq Cybersecurity ETF (CIBR), which charges 0.6%. At the point, HACK had $950 million in assets, while CIBR had $218 million.

“I alerted Andrew, and the Nasdaq and Andrew sued us,” said Masucci. “When Andrew sued us he violated provisions in our agreement precluding him from taking any actions that interfered with the operation of the fund. We would have not terminated them if they had not sued us.”

Masucci also said that Chanin did not originate the idea for the fund. He said that came from Kris Monaco and his team at ETF Ventures, a division of ISE, which was later acquired by Nasdaq. Masucci said Nasdaq disbanded the ETF Ventures team. Monaco, who was instrumental in creating the index that PureFunds ISE Cyber Security tracked, is one of the founders of Prime Indexes, which is providing the new index for the fund.

Chanin disputes the claims by ETF MG. He said PureFunds and ISE were partners and they hired ETF MG, not the other way around. And that it was PureFunds and its partners that helped cover the fund’s expenses.

In the complaint filed in the Superior Court of New Jersey, PureFunds claims that ETF MG was retained to “empower” PureFunds to launch their ETFs. PureFunds alleges that ETF MG “trumped up false securities violations” with the purpose of obtaining control of the PureFunds business to pocket millions in annual revenue. It also alleges that ETF MG reduced the “profit” that PureFunds was to receive from “their ETFs.”

“The pressure on asset managers to reduce their fees is as great as it’s ever been,” said Ben Johnson, Morningstar’s director of global ETFs research. “The vast majority of flows are going into the ones with absolute rock-bottom expense ratios. That’s the trend.”

HACK has risen 10.4% this year, but is down 4.8% in the past three months. CIBR, which was launched in June 2015, is up 8.3% this year, but also down 4.8% the past three months.

CIBR now has $275.6 million in assets.

The two funds have similar top holdings. HACK’s 39 holdings as of Aug. 15 were topped by Cisco Systems at 4.75%, Palo Alto Networks at 4.49% and Symantec at 4.12%. CIBR top holdings were Palo Alto Networks at 6.87%, Cisco Systems at 6.31%, and Akamai Technologies at 6.09%.

The other funds affected by the change, with assets and expense ratios:

This was originally published in Investor’s Business Daily.

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Interactive Brokers Aims For Best Platform, Lowest Price

Interactive Brokers Group has broken into the top ranks of online brokers, excelling in several categories deemed important to investors.

Interactive (IBKR) joins four other brokers in the top five for overall customer experience in Investor’s Business Daily’s annual ranking of online brokers.

The nation’s largest electronic broker in terms of daily average revenue trades, Interactive won top marks for low commissions and fees, trade reliability, site performance, equity trading tools, mobile platforms/mobile trading opportunities, options trading platform, portfolio analysis and reports, and ETF choices.

The message seems to be getting out to investors. In 2015, when the stock market ended slightly lower, the Greenwich, Conn., company saw the number of accounts grow by 18%, and 1% in December alone, to 331,100. Client equity increased 19% year over year to $67.4 billion.

Comprising two segments, a global electronic broker and a market maker, the firm processes trades in securities, futures, foreign-exchange instruments, bonds and mutual funds on more than 100 electronic exchanges around the world.

Hungarian immigrant Thomas Peterffy founded the firm in 1977 and launched the Interactive Brokers platform in 1995. Since then it has become one of the leading brokers for professional and semiprofessional investors, as well as institutions.

Biggest And Cheapest Broker

Still serving as chairman and chief executive, Peterffy said his firm is the largest and least-expensive stock broker in the world. In December 2015, the firm recorded 628,000 DARTs and an average commission per client order of $2.09 for securities and $6.33 for options. For orders of 100 shares, it charges just $1. He also said the average amount charged for a margin loan is 1.3%, which undercuts all of the firm’s competitors.

“Our philosophy is to offer the best platform at the lowest price,” Peterffy said in an interview with Investor’s Business Daily. “We don’t sell our customers orders, but seek to execute them at the best possible price. The total transaction cost on 2.5 trillion stocks, including market impact and fees, was 0.8 basis points.”

He said the firm sits in a sweet spot between investment banks and online brokers.

“The online brokers don’t need all the sophisticated stuff we provide, and the big investment banks will not take people with less than $5 million,” Peterffy said. “Our target clients are sophisticated individuals or institutional traders and investors.”

Over the past year, Interactive added a lot of research, news providers and analyst ratings to the platform. It also introduced a portfolio builder that allows clients to screen stocks based on fundamental and technical data, assemble portfolios that automatically rebalance and lets them back-test the portfolio’s performance over various time periods.

Investor’s Marketplace

Another feature Interactive introduced last year to help set itself apart is transparency. Interactive now lets clients see the number of shortable shares available in real time without having to call the broker. It also lets clients see the lending rate at which stocks may be borrowed to be shorted. You won’t find this at the wirehouses.

In 2015, it also launched a service called the Investor’s Marketplace, which gives clients one-stop shopping access to investors and third-party service providers around the globe. It’s a place where traders, investors, financial advisors, fund managers, research analysts, technology providers and business developers can advertise, explore and do business with each other.

Part of the Investor’s Marketplace will be the Hedge Fund Marketplace, where qualified investors may view and download information posted by participating hedge funds, including private placement memoranda, subscription information and performance summaries.

As of June 2015, the Marketplace had more than 300 advisors, brokers, money managers and hedge funds, 120 research providers, 75 administrative service providers and 295 participating technology providers.

In 2016, the company planned to relaunch Covestor, an online money manager it acquired in 2015. Covestor lists money managers and traders who run investment portfolios. Clients will be able choose a money manager and set up accounts that mirror the managers’ portfolio, essentially trading along with the manager.

To View IBD’s Full Best Online Brokers Report

This was originally published in Investor’s Business Daily.

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WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

White-Labeling Lets Firms Launch ETFs At Low Cost

As the exchange traded fund industry grows, more money managers are jumping on the bandwagon and creating their own ETFs. However, some new entrants are neither large money managers nor mutual fund families. They’re small companies, or just guys with a dollar and a dream of running an ETF.

To help these people achieve their dream, a niche business called white-labeling ETF companies has emerged to build and launch funds for a fraction of what it typically costs.

Creating an ETF “from start to finish, for all the contracts, the average is between $750,000 and $1.25 million, and anything less than that is a gift,” said Bob Tull, an independent financial-product consultant, who has helped develop more than 300 ETFs of all kinds. “That’s the total for exemptive relief, the prospectus and all the contracts.”

But because they already have the infrastructure in place, white-label firms can help a small player bring an ETF to market for about $100,000.

White-labeling, most commonly seen on generic products in supermarkets, is where one company produces a product or service and lets another company put its brand name on it. Thus, the second company looks like it made the product.

The ETF industry consists mostly of huge money managers or mutual fund companies, which built the infrastructure to create and run investment vehicles. But many of these new ETF players have little, if any, of this infrastructure. Instead of spending the money to build it on their own, they’ve outsourced the job to ETF white-labelers.

White-labelers have brought more than 30 funds to the market, and many more are in the works.

“A lot of people don’t want to deal with the daily requirements of maintaining the ETF. That’s what we do for them,” said Sam Masucci, the chief executive officer of Exchange Traded Managers Group, a private-label issuer firm in Summit, N.J., known as ETFMG.

Using Exemptive Relief

More important, the small player gets to use the exemptive relief previously obtained by the white-label firm. In order for an ETF to trade on the stock market, it needs to break a few rules in the regulation that controls mutual funds, the Investment Company Act of 1940.

The ETF firm must apply to the Securities and Exchange Commission for permission to break the rules. This permission is called exemptive relief. Depending on the complexity of the fund, it can take upwards of two years to be awarded.

After a firm receives its exemptive relief for a category of funds, the process to create additional ETFs can take a little as three months.

This concern made PureFunds, an independent ETF research house based in Mendham, N.J., go with a white-label firm instead of filing on his own. PureFunds Chief Executive Officer Andrew Chanin said he had already seen ideas he wanted to launch get scooped up by other firms and hit the market.

“Our big fear was we would file for the fund and it would take too long to approve,” said Chanin. “Being a start-up, if someone beat us to the market, that would be enough to sink the company before we got out of the gate.”

Silver Away

ETFMG helped PureFunds launch the PureFunds ISE Junior Silver ETF (SILJ), which tracks small-cap silver-mining companies. ETFMG helped PureFunds develop and vet the idea and find an index maker to produce the index and methodology requirements.

It then helped write the prospectus and let PureFunds use its exemptive relief. During the time the SEC was reviewing the filing, ETFMG put in place all the third-party agreements with accountants, lawyers, authorized participants and the exchange it would launch on. Now, ETFMG manages the daily operations for the fund.

Meanwhile, PureFunds is responsible for marketing the fund and bringing in assets. Currently, the fund has just $5.6 million in assets under management. But that could soon change. Year to date, the fund is up 26%.

Originally published in Investor’s Business Daily.

Currency Hedge ETFs Win Big at Global ETF Awards

Deutsche Bank’s family of Currency Hedge ETFs won the award for the Most Innovative ETF in the Americas for 2011 at the 8th Annual Global ETF Awards. The awards are given to industry participants for outstanding achievements in the marketplace. In Europe Deutsche Bank tied with the Nomura Voltage Mid-Term Source ETF for the top prize, while the Motilal Oswal Most Shares NASDAQ-100 ETF was named most innovative in the Asia-Pacific region.

The five ETFs under the Currency Hedge banner:
db-X MSCI Brazil Currency-Hedged Equity Fund (DBBR)
db-X MSCI Canada Currency-Hedged Equity Fund (DBCN)
db-X MSCI EAFE Currency-Hedged Equity Fund (DBEF)
db-X MSCI Emerging Markets Currency-Hedged Equity Fund (DBEM)
db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)

The Most Innovative Exchange Traded Product (ETP) in the Americas went to the iPath S&P 500 Dynamic VIX ETN (XVZ), while the db Physical Gold SGD Hedged ETC won in Europe.

Held at the Grand Hyatt Hotel in New York last Thursday, the Global ETF Awards provide a window on how the global ETF industry views itself. Unlike the Capital Link awards, where a small committee of analysts and industry insiders choose the winners, the Global Awards is voted on by the entire ETF industry. Here 520 organizations from around the world voted on who they think are the industry’s leaders and innovators. The awards and ceremony were created and run by the operators of exchangetradedfunds.com.

The evening began with a new prize, the Nate Most Award. Named after the man who invented the SPDR, the first ETF, it’s awarded to the individual who has made the greatest contribution to the ETF Market.

“We honored to be able to celebrate Nate’s place as the father of the ETF and to honor achievements in the ETF industry,” said Arlene C. Reyes, chief operating officer of exchangetradedfunds.com.

The first winner of this new prize was James Rose, senior managing director of State Street Global Advisors, for his commitment to the industry and for setting a standard of excellence. In addition to running State Street’s ETF business he serves as the first chairman of the Investment Company Institute’s Exchange-Traded Funds Committee.

“Nate Most created a product that created an industry and a great product for investors,” said Ross upon receiving the award.

Here is the list of other winners:

Most Innovative ETF Index Provider

The Americas – Dow Jones Indexes
Europe – STOXX
Asia-Pacific – MSCI

Most Widely Utilized ETF Research (Statistical)
Deutsche Bank won in all three regions.

Most Widely Utilized ETF Research (Analytical)
The Americas – Bloomberg
Europe – Deutsche Bank
Asia-Pacific – Deutsche Bank

Best ETF Market Maker

The Americas – Knight
Europe – Flow Traders
Asia-Pacific – Flow Traders

Most Recognized ETF Brand

The Americas – SPDRs
Europe – (Tie) db x-trackers and iShares
Asia-Pacific – China 50 ETF

Best Service Provider
The Americas – BNY Mellon
Europe – (Tie) Northern Trust and State Street Fund Services (Ireland)
Asia-Pacific – SSgA

Most Informative Website

The Americas – SPDRS.com
Europe – etf.db.com
Asia-Pacific – hkex.com.hk

Most Informative Website – Media

The Americas – IndexUniverse.com

ETF Cash Inflows Fall 85% in August

Net cash inflows for ETFs and ETNs fell to $2.0 billion in August, an 85% drop from the $13.2 billion seen in July, according to the National Stock Exchange (NSX). However, over the same period, notional trading volume for ETFs and ETNs doubled to $2.99 trillion, representing 37% of all U.S. equity trading volume.

Blackrock posted the biggest outflows of the month at $4.95 billion.

Still, 2011 has seen total net inflows of $73.2 billion for the year-to-date ending Aug. 31, 54% greater than the $47.6 billion for the same time last year. Net cash inflows for the first eight months of 2010 were also 12% below the same time period in 2009.

Long fixed income funds saw the most August inflows with $4.73 billion, up from $2.6 billion in July. Long-leveraged U.S. equity came in second with $3.10 billion. Long U.S. equity funds came in third with $1.11 billion, however, year-to-date, this category leads with $25.9 billion. The largest outflows were seen in long global equity funds. Commodity funds saw the second largest outflows in August with $1.45 billion.

NSX says at the end of August there were 1301 listed ETF/ETN products with $1.06 trillion in assets, a 31% increase over the same period last year, but down 4% from July’s total of $1.11 trillion.

Bounce of a Dead Cat

Both the Dow Jones Industrial Average and the S&P 500 have given back more than two-thirds of their opening rally by 11:30 a.m.

David James of James Investment Research says the fear gripping the U.S. stock market make conditions good for a rally, but he adds, “Unfortunately, the expected rally is unlikely to be the start of a new bull market.” In addition to concerns about the sustainability of economic growth, valuations are still to high. “Looking at the CAPE (Cyclically Adjusted Price to Earnings) ratio, we find most bull markets begin when one has to pay $10 or less in stock price to get $1 of corporate earnings. Today? One must pay over $20; too expensive.”

Graham Summers of Phoenix Capital Research says,”In plain terms, the market’s are in full-scale Crisis mode. While stocks have bounce hard temporarily the rest of the financial system is in a complete and utter panic.”

Even as the markets rise, so does gold. The SPDR Gold Trust (GLD) was up 2% to $184.

It’s a dead cat bounce, kids. And a good time to put in some shorts if you couldn’t last week.